By Omer Abdullah, Managing Director, The Smart Cube, Inc.
The last 2 decades have seen a sea change in the Procurement function’s (and the Procurement executive’s) standing within the organization.No longer the proverbial ‘back water’ department, Procurement now occupies an important seat at the executive table – a development that has been driven by two interrelated factors. The first is the clear realization of the value that the function can deliver to an organization – and by value, we don’t simply mean cost savings and thereby direct profit improvement (which is certainly the case) but also Procurement’s ability to contribute to growth, through innovation, new product development and more. The second factor is the flip side of this coin – the marked improvement in the caliber of the function and its resulting ability to deliver to the value creation remit.
In other words, not only should it be clear that procurement can deliver value, but it clearly must be able to deliver that value.
This ability to deliver value is itself a function of two intertwined forces – the caliber of the individuals within the function and their ability to effectively deploy the tools at their disposal to deliver results.
From a ‘caliber of the individual’ perspective, the last two decades have seen the emergence of the progressive procurement executive – an individual who is driven by several key success traits: strong leadership skills, a clear bias for action, an objective and dispassionate view of their remit (in this case, spend and the related supplier relationships), and, an underlying, unrelenting adherence to the principle of ‘lowest total cost’.
However, the ability of such an individual to capitalize on the opportunity at hand depends on how well he/she can effectively deploy the tools available to them to enable action and realize results.In other words, it isn’t simply the availability of the tools but the ability to know how to use them and to what end.The galvanizing force, in this context, is information, or more specifically, intelligence. Not to be confused with data or technology (though both are contributing elements), intelligence in this context means data translated into insight, at the right place and at the right time.
Consider the following, not uncommon scenarios (and ask yourself if this is the case in your enterprise):
• Marketing services accounts for a sizable portion of spend in many corporations, yet it is typically controlled, negotiated and managed outside of the procurement function – the core argument being that procurement doesn’t understand the complexities and requirements of the function. Is this the case in your enterprise? Have you (the procurement professional) developed a critical understanding of the market – its size, structure, dynamics, emerging developments and trends, pricing models at play, the supplier landscape, and beyond? Is this to a level where you can engage in discussion and debate with your marketing counterparts about the merits and demerits of working with a specific set of vendors, technologies, solutions?
• In many direct and indirect spend categories – from IT applications to specialty chemicals – the basis for evaluating market and pricing movements is to have a fundamental understanding of the economics behind the category itself. Is this the case in your enterprise? Do you understand the makeup of cost drivers for, say, specific classes of legal services, the impact of ‘labor rates’ across different states, working practices across regions, and the distribution of activity by work type across different levels of a law firm?
• One of the most prominent operations/procurement issues over the last 24 months has been that of Supplier Risk Analytics and its resultant (potentially debilitating impact) on the supply chain. The progressive procurement professional has to have been able to speak the language of Finance, coupled with that of Strategy to be able to analyze and assess not only the value chain and associated inherent risk factors (geopolitical, social, regulatory, economic, etc.) of their products but also the business and financial viability of their strategic suppliers. Is your team effectively equipped to do this?
The traditional approach to intelligence has been for executives to rely on experience to inform their decision-making.Some others go one step further and arm their category leaders with information databases – useful add-ons, to be sure, but still only part of the solution.While this may have been acceptable in the past, the advent of a range of forces such as globalization, supply market consolidation, greater market complexity, increased competitiveness in most industries as well as the emerging interplay with other corporate functions (be it with Finance, Legal, Marketing, HR or otherwise) demands a more rigorous and disciplined approach.
The implication is simple – procurement intelligence is a key enabler to the success of the function, and a central force in being able to achieve an organization’s operational goals.However, integrating such intelligence into everyday category management operations requires a diligent, structured approach involving a host of factors, from having the right information sources to acquiring the right skillsets to partnering with the right external vendors, and beyond.Only then can the Procurement function realize and deliver on its full potential.